Thursday, December 9, 2010

Secular Bear and Cynical Bull

I would usually use the term “cyclical bull” or “cautious bull,” but this week a client tagged me with a new moniker, a “cynical bull.” To be fair, lately I’ve been describing two different ways you could be bullish and one of them I describe as being cynically bullish. Let me explain. It seems to me that lately you could be a “virtuous bull” or a cynical bull. Virtuous bulls see the stock market in the context of an expanding economy. While there are obviously structural problems with the U.S. and the global economy, the fact is that we ARE in an economic recovery that began last June. Most economic recoveries are built on a wall of worry where trailing economic indicators, namely employment statistics, take awhile to confirm the economic expansion. To be a virtuous bull means that you are expecting the “virtuous economic cycle” to find some traction. The virtuous cycle is the classic economic expansion where growing corporate profits leads to greater consumer confidence. Higher confidence leads to higher spending. Higher spending leads to increased employment as companies must hire new workers to meet increasing demand. All of which leads to higher sales and higher profits…and so the cycle continues. Given that we are only 1 and ½ years into an economic recovery, virtuous bulls see nothing but several years of economic growth (even if it’s less than average growth) and higher stock prices ahead.

Cynical bulls are an entirely different breed. They see the financial markets as being “rigged” where policymakers and large financial institutions are desperately trying to avoid a financial catastrophe. In the cynical world, big banks in cahoots with Central Bankers and politicians around the globe are changing the rules to flood the world economy with enough money to touch off significant asset inflation. This is one of the traditional methods of dealing with a debt crisis. By allowing assets to inflate you can bring debt to equity ratios in line without the bothersome problem of paying off debt. Cynics find great joy in economic policy designed to prevent deflation at any cost and jump with glee as the Federal Reserve obviously manipulates the U.S. currency while claiming, with a straight face, that they are actually only interested in stimulating the economy and creating jobs. Asset inflations are wonderful opportunities to make money if you are a cynical bull since we believe our job is find asset inflations wherever we can find them and make lots of money by investing in them.

Of course the trick of riding an asset inflation bubble is 1) finding them closer to the beginning of the bubble than the top of the bubble, and 2) selling them before they burst. Cynical bulls don’t really care about the distinction between a virtuous cycle and a cycle that is induced by stimulus programs that will be paid for by the next generation…or the Chinese. We just care that getting too far out of the market when the candle gets lit and policymakers start spending the money is a risky thing to do if you want to be in a market with generally rising prices. This week’s drama in Washington where it looks like we get income tax extensions, estate tax cuts, payroll tax holidays, unemployment insurance extensions, credits for small businesses, and much, much more, is just music to the ears of a cynical bull. The game is still afoot and there is probably still more life in this bull market as long as the money-producing spigot is still open.